Claiming tax credits for charitable donations at death

par Doug Carroll | March 17 2014 08:18PM

At issue
While donations to charity should always be driven by philanthropic desire, tax issues can influence the manner and timing of a gift.Our tax system provides a fair amount of flexibility to allow donors to manage the fiscal component in an optimal manner. Although the charitable tax credit is limited to a donation amount up to 75% of a taxpayer’s net income, any unused amount may be carried forward up to five years.

This carryforward opportunity obviously has limited value for donations made at death. In recognition of this, special rules have long applied to estate-related donations. Here are some milestone developments in this field, including the most recent evolutionary proposal from the 2014 Federal Budget.

Section 118.1 of the Income Tax Act (ITA)

This is the section of the ITA dealing with claiming the charitable donations tax credit. It spans three dozen or so subsections, with the key provisions regarding donations at death in ss.(4) through (5.3).

Rather than the general 75% limit, the donation limit is 100% when claimed in the year of death, or “terminal year”. Any excess may be carried back to the year prior to death, where again the higher 100% threshold applies. Donations made by way of a donor’s Will are deemed to occur in the donor’s terminal year, and may also be carried back to the prior year.

Federal Budget 2000 – Designations in favour of charity

Up until February 2000, donors faced a conundrum when determining how to make donations sourced from a RRSP, RRIF or life insurance policy. To take advantage of the deemed donation at death, such proceeds would have to come into the estate, and in turn be donated via the Will provisions. Of course this would potentially expose those proceeds to estate creditors and administrative delay.

In order to provide consistency in the income tax rules, the 2000 Budget allowed direct beneficiary designations to also be deemed to occur in the donor’s terminal year, with the same carryback provision. It applied retroactively with respect to deaths after 1998.

(The treatment was extended to beneficiary designations from TFSAs once they became available in 2009.)

Federal Budget 2014 – Estate donations

A donation made by an estate may only be applied against the estate’s income tax otherwise payable. As proposed, donations made by will and direct beneficiary designations will now be deemed to have been made by the estate. For qualified donations occurring in the first 36 months of the estate, the trustee of the estate will have the flexibility to allocate the available donation among any of:

  • the taxation year of the estate in which the donation is made;
  • an earlier taxation year of the estate; or
  • the last two taxation years of the individual
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    This measure will apply for donations in the context of a death that occurs after 2015. For other estate donations, the credit may be claimed in the donation year, again with the five year carryforward.

    Practice points

    This greater flexibility may allow individuals to simplify otherwise more complex estate planning previously put in place to work around some of these hurdles. A coordinated consultation with lawyer and financial advisor might be considered.

    Direct beneficiary designations will continue to be the most efficient route for timely and intact delivery to the charity. Where the particular plan proceeds may be needed for the estate’s liquidity however, it may be necessary to channel funds through the estate proper.

    Where a legacy donation requires conversion to cash, this should provide estate trustees with some welcome relief not to have to rush to dispose of assets. Of course, they should otherwise perform their duties with due expediency.